Digital Gold In Emerging Markets: What Are The Opportunities and Challenges For Investors?

Indians are well-known for their attachment to Gold. Most auspicious events involve the purchase, exchange or gifting of gold. Traditionally, gold was purchased in the form of jewellery, gold coins or bullions. Today however, gold is available in the digital form as well, through instruments such as Gold Exchange Traded Funds (ETFs), Sovereign Gold Bonds (SGBs), Gold Mutual Funds , Gold Futures Contracts, etc. Like every other investment product, they also come with their own unique set of advantages and disadvantages. A study of the risks and the rewards will help investors decide the extent to which the range of digital gold products are suitable to their product portfolio.

Advantages Of Digital Gold:

Opportunity For Diversification Of Investment Basket:

Given that gold prices are far less volatile as compared to the stock market, purchasing digital gold allows the risk-averse investor an opportunity to diversify his or her investment base with relatively more stable returns. Gold’s intrinsic value also enables it to act as a hedge against inflation and currency fluctuations.

Ease Of Investment and Disinvestment:

Unlike physical gold, transactions in digital gold can be completed with a few simple clicks in a matter of seconds. Some gold loan companies in India and fintech apps have leveraged UPI, making the digital gold investment and disinvestment journey even more seamless and hassle-free, available 24X7. There is no need for submitting KYC or bank details. You can sell the digital gold in parts or the entire amount, whenever you require. Alternatively, you can ask for the gold to be delivered to your doorstep

Safety, Security & Purity:

With digital gold, the buyer need not worry regarding safe-keeping of the gold. Investment in digital gold comes with the assurance of it being stored in fully insured vaults.This assurance comes in handy when approaching a gold loan company for a loan against digital gold.

Small Investment Amount:

Perhaps one of the most significant advantages is the fact that an investor can invest as little as Re1/- for the purchase of digital gold. Investors can keep adding to their purchase as and when able.

Loan Against Digital Gold:

Some finance companies and gold loan companies in India, that traditionally offered loans against physical gold have branched out to offer loans against digital gold as well. Approaching a gold loan company or jeweller for a loan in exchange for physical gold comes with its own set of risks and worries, such as whether the gold will be replaced with something of lesser value, thus making digital gold a more attractive proposition in this case.

Financial Inclusion:

The ease of investment in digital gold makes it possible for many who do not possess a bank account to invest in digital gold as an instrument of savings and investment. This is especially convenient for those with mobility challenges and for those in remote areas, where going to a bank means travelling long distances and sacrificing a day’s wages.

Tax Benefits:

In the case of SGBs, there is no capital tax gain on returns if an investor holds the bonds till maturity.

Challenges In Respect Of Digital Gold:

While there are several opportunities presented to investors as a result of the emergence of Digital Gold, there are also several challenges associated with it.

Lack Of Regulation:

Perhaps the greatest challenge is that there is no official body to regulate the digital gold industry. Thus, investors have to independently evaluate the risks and challenges associated with the provider of the digital gold. While investments in SGBs issued by the Government of India are a safe investment, the minimum investment amount is 1 unit, equivalent to one gram of gold.

Digital Literacy and Connectivity:

Dealing in digital gold requires access to technology, internet connectivity as well as a level of literacy in order to carry out the required transactions. In many rural and interior areas, connectivity is a huge challenge. In addition, only 20% of the Indian population know how to use the internet.

Handling Charges:

In the case of Gold ETFs and other exchange traded instruments, the investor is also required to hold a demat account. In most cases, this will entail annual maintenance charges as well as brokerage charges, which could turn out to be expensive in the long run. In the case of platforms offering to deliver physical gold or jewellery to the investor in place of physical gold, there often is a making charge involved.

Liquidity:

While digital gold and ETFs are highly liquid instruments, gold bonds do not offer the same degree of liquidity.

To conclude –

Digital gold helps overcome some of the challenges associated with the purchase and storage of physical gold. However, with some of the digital gold products not coming under the ambit of a regulator, investors need to ensure the stability and reliability of the digital gold platform before venturing into a purchase. So by the time you make the digital shift, put your physical gold to use and apply for a gold loan at IIFL Finance where you get the best gold loan interest rates and quick approvals. With least documentation, end-to-end digital procedures and assistants, you get the best value for your gold.